Kelley: New on Netflix -- whining and entitlement thinking

I have never received a missive from a chief executive officer before, much less one that began, "Dear Beverly, I messed up. I owe you an explanation."

The remarkably frank mea culpa — in which the aforementioned CEO criticized the way he had communicated a pricing change — actually included the sentence, "In hindsight, I slid into arrogance based upon past success." The email was signed "Respectfully, Reed Hastings, Co-Founder and CEO, Netflix."

Hastings' dispatch gave me pause.

I have been a subscriber to Netflix since December 2006. I've stuck around for two main reasons. First, with the two-DVD plan, I can expect a new red envelope in my mailbox, six days a week. The turnaround, since I reside near a distribution center, is close to warp speed. Second, the return date for any DVD I select is always "whenever."

So why did Hastings feel the need to issue me an apology?

It all started when the highly successful entrepreneur opted to separate his streaming video service from the DVD-by-mail division — a decision that makes perfect sense given his underlying rationale.

Streaming and DVD-by-mail are completely separate businesses. Each requires a very different cost structure, distribution method, marketing approach and management style. Most important, however, is the issue of licensing fees.

To rent out a DVD, all Hastings had to do was buy it. Netflix was spared any per-view or per-customer fees. To offer streaming (TV or film), however, Hastings was forced to shell out fees based on his total number of subscribers — currently at a staggering 26 million.

Studios in Tinsel Town are demanding that Hastings pay a per-subscriber-per-month licensing fee despite the millions of customers who rarely or never stream. Only by splitting Netflix in two — Qwikster (DVDs) and Netflix (streaming only) — was the second company, Netflix, eligible to compensate Hollywood on the basis of a substantially smaller subscriber base.

The carping coalesced around dual points of contention — cost and convenience. All subscribers were asked to accept a price hike. Streaming only costs $7.99 a month. Two DVDs-at-a-time costs $11.99 a month. Those desiring both (hybrid) would be billed separately (total $19.98) by both Netflix and Qwikster.

While I don't relish price increases any more than the next guy, I do understand the need for them — given spiking costs in all other sectors of the economy. Netflix, for me, is a necessary luxury. What I don't understand, however, is all the griping about inconvenience.

"It's as if I went to Mickey D's and had to stand in one line to order the bun, and another to order the meat," posted Lory Montgomery. Really, Lory? Where exactly are you standing in line?

Visiting two different Internet sites, depending on the delivery system I choose for a film or TV show, doesn't pose much of a hardship or hassle for me.

Yet a poll by PC Magazine found that 55 percent of Netflix members were going to pull the plug on their subscriptions.

Since July 12, Netflix Inc. stock has plummeted 55 percent.

Every day, financial analysts and money managers predict that is it only a matter of time before Netflix goes belly up.

Hastings has made tough decisions before. In 2005, for example, he decided to cut Netflix's pricing to defuse a competitive threat from Blockbuster. A Wall Street chorus of Cassandras, stuck in dirge mode, predicted the end was near for Netflix. Yet, wasn't it Blockbuster that shuttered its stores?

In the end, separating DVDs from streaming will prove a better deal for all Netflix customers.

It's important to remember that Hastings wasn't apologizing for the changes — it was his clumsy miscommunication about the changes that he regretted.

"I got the idea for Netflix after my (first) company (Pure Atria) was acquired," the Netflix CEO told The New York Times. "I had a big late fee for 'Apollo 13.' It was six weeks late and I owed the video store $40."

The day he founded Netflix, Hastings didn't know if anybody would sign up, but unlimited due dates and nonexistent late fees seemed to work in a powerful way.

When Hastings was featured in a front-page article in USA Today in 1995, he posed with his Porsche. These days, he told the Wall Street Journal, he would surround himself with "a bunch of movies." Hastings' all-time favorite is "Gloomy Sunday" — a love triangle set in Budapest — complete with sadness and redemption.